Goldman sees end of yuan ‘sweet spot’ spurring capital outflows

The end of a “sweet spot” that China enjoyed with its exchange rate – strength versus the US dollar and weakness against trading partners – will spur renewed capital outflows, according to Goldman Sachs/Gao Hua Securities Co.

Song Yu, China economist for Goldman Sachs/Gao Hua, told Bloomberg in an interview that cash outflows will accelerate in the face of another looming interest rate hike in the United States and growing pressure on China to ease its monetary policy.

The renminbi has declined 1.3 percent against the greenback this month, with policy makers last week setting the currency’s daily fixing at the weakest level in five years, and was little changed against a basket of peers.

The yuan’s retreat has raised concerns about a possible repeat of the turmoil ignited by a surprise devaluation in August, which spurred an estimated US$1 trillion in annual capital outflows, or the volatility in January that roiled global markets.

However, Song believes that market reaction this time around will be more subdued because the People’s Bank of China has many policy tools to manage the depreciation.

“The government is likely to resort to what they did in the second half of last year and earlier this year, which is adding more curbs and stepping up regulation of fund flows,” Song said.

“But this is very much like a game of a cat trying to catch the rats – whenever the government manages to block a hole through which capital leaks out, people can always dig another hole to bring the money out over time.”

In February and March the central bank allowed the yuan to have limited gains against the dollar to combat capital outflows while guiding its depreciation against the currencies of trading partners to help exports.

That plan, aided by the greenback’s biggest quarterly decline since 2010, has been thwarted by a surge in the US currency as the Federal Reserve prepares to raise borrowing costs.

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